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21 October 2014
The precise extent of the financial information that a franchisor must provide to franchisees as part of pre-contractual disclosure is a recurring issue in the French courts; statistically, it is the most common matter in French case law on franchising. However, as has become increasingly apparent in recent years, this issue is not only limited to the relationship between a franchisor and its franchisees, but also involves third parties, including the franchisor's competitors.
This is illustrated by a recent court of appeal judgment(1) in the notorious battle between the main pizza retail brands in France – involving, in particular, Domino's Pizza and Speed Rabbit Pizza. The two brands regularly accuse each other of copying or imitating each other's promotional materials and marketing campaigns. However, beyond these usual accusations, one of the points at stake in this case was whether a franchisor's failure to file its annual accounts in accordance with the law could constitute unfair competition to the detriment of competitors.
As in many other countries, French companies (with the exception of very small companies) must file their annual accounts with the local commercial court – together with their auditor's reports and consolidated accounts, as the case may be – within one month of the annual shareholders' meeting. If a company fails to file its statutory accounts, any interested party may request the court to order such publication, subject to a penalty. The court may also order such measure of its own motion. Finally, failure to comply with such filing obligation gives rise to a criminal fine.
However, many companies still refuse to make their financial statements public – and therefore run the risk of prosecution – on the ground that competitors may use this information against them.
In the case at hand, the court held that Domino's Pizza – which had failed to file its statutory accounts for a certain period – had unduly "captured" franchisees and breached the principles of transparency and fairness in commercial dealings.
The court's position is surprising, as a franchisor's financial statements for the previous two years must legally be provided to a prospective franchisee as part of the franchisor's pre-contractual disclosure obligations. However, in the court's opinion, this is insufficient: a franchisee should have access to publicly available financial information before requesting it from the franchisor. In other words, when an interested candidate requests pre-contractual information from the franchisor, it is already committed to that particular franchising system and can no longer compare the figures provided with those of competing franchise networks.
However, this position seems odd, as merely requesting financial information from a franchisor does not mean that the prospective franchisee is already contractually committed to such franchisor. The court's position would have been understandable had it found that in order to obtain the relevant information, the franchisee had to pay a substantial amount of money (eg, a reservation fee or an advance on the franchise fee) – but the court mentioned nothing in this regard.
Further, the franchisor's statutory accounts are per se insufficient to give a prospective franchisee a full and accurate picture of the franchise's profitability. By contrast, pro forma management accounts for a sample franchised outlet are much more relevant to measure such profitability and allow the franchisee to make a useful comparison with other concepts.
While the court's decision is thus somewhat flawed, and may still be overruled by the Supreme Court, franchisors operating in France should take care to file their annual accounts properly and in a timely manner.
For further information on this topic please contact Raphael Mellerio at Aramis Law Firm by telephone (+33 1 53 30 7700), fax (+33 1 53 30 7701) or email (email@example.com). The Aramis Law Firm website can be accessed at www.aramis-law.com.
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